I HAVE been missing a trick. Despite a long and often painful education in the hard-knocks school of investment, it appears I have consistently overlooked the power of compound interest – or, more accurately, the importance of reinvesting dividend income – to turn good profits into great profits.

I have jet lag to thank for this belated discovery. I am writing this column from New Zealand, where I am visiting an errant son and following the progress of the England cricket team. My body clock has been slow to adjust to southern hemisphere rhythms – so slow, in fact, that I am starting to resemble one of the country’s yellow-eyed penguins.

Unable to sleep one night, and having exhausted my supply of reading matter, I turned on the laptop to look at my mail. And there, forwarded by a City acquaintance, was the answer to my prayers: the Barclays Capital Equity Gilt Study 2008. A compendium of performance data stretching back over a century or more. If this didn’t send me to sleep, nothing would.

I was wrong. For there on page 57, under “The importance of reinvestment” were some of the most striking statistics I have ever seen. Did you know that £100 invested in shares in 1899 would today be worth £13,580? That sounds impressive but its real value, after adjusting for inflation, is just £209.

However, those figures merely reflect the growth in the capital value of the shares. If the dividends paid out on those shares had been reinvested in more shares throughout the period, the value of that same portfolio would now be more than £1.6m.

The importance of reinvestment is even more marked when it comes to gilts. Without reinvesting the annual coupons, £100 invested in gilts in 1899 would now be worth £45 – or just £1 in real terms. With income reinvested, it would be worth more than £21,000.

In both cases, the maths relies on income reinvested gross. Net of tax, the picture would be somewhat different. But, in the case of shares, there is clearly a magical process at work in which the shares bought out of dividends beget more dividends, usually at a rising rate. Combine that with the effect of generally rising share prices and the compounding effect is striking.

Most big companies offer automatic dividend reinvestment plans. Stupidly, I have never availed myself of one – perhaps because the attraction of receiving and then banking the dividend cheques appeals to some atavistic urge in me to handle and hoard my gains.

Dividend reinvestment plans can also be messy. They leave you with odd amounts of shares and complicate the paperwork. But, pardon the pun, that complication clearly pays dividends.

There has been one change to my portfolio in the past month. I have bought some shares in IMI, which makes high-tech valves and retail dispensing equipment. I had a good run in IMI, selling out in 2006 at 512p. I have just bought them back at 410Çp.

IMI has reinvented itself in the past decade. It used to be synonymous with copper pipes and tubes. Now it is in some quite exciting areas. It has also shifted a lot of production to low-cost areas such as Mexico and China.

I bought the shares shortly before the recent set of figures. I reckoned they were selling for less than 10 times earnings and (always important to me, but now doubly so) offering a secure dividend yield of around 5%.

When the figures came, the company was as upbeat as could be. Not only were the 2007 numbers good but the new year is off to a strong start with organic growth of 7% and a pickup in orders throughout the business. This was the sort of statement you pray for as an investor.

Since then the shares have enjoyed a bit of a run with widely reported rumours that Honeywell of the US wants to bid for the company. If so, it will clearly have to pay a lot more than today’s price.

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